The new Government Special Savings Incentive Scheme should shake up the savings and investment market. Customers are expected to benefit as a broad range of financial institutions compete for a share of the new savings, and to ensure they keep any exodus from their existing funds within their own institutions.
Fund managers are expected to pare back traditional management fees to attract business - hoping to maintain profit levels through increases in the volume of business. Banks and building societies will have to offer attractive deposit and other products to retain some of their existing savings.
When the full details of the scheme are published in coming weeks, financial institutions are expected to quickly launch innovative products, offering savers a wide range of choices.
The lure of free money from the Government is expected to draw new savers into the market. But it will also cause many existing savers to look more carefully at what their existing savings accounts are offering.
Savers who will be able to get a 25 per cent free top-up from the Government on their savings before any return from investing their funds will have to look critically at low interest deposits and non-performing investments. One of the institutions expected to come under pressure is the Post Office Savings Bank, which manages savings funds on behalf of the National Treasury Management Agency. Its Savings Certificates offer interest of just 16 per cent tax free after five-and-a-half years, while its Savings Bonds offer just 8 per cent tax free over three years.
On May 1st the new accounts will come in into effect, so savers and potential savers will need to know what is involved so that they can look for the best deal on the market to suit their own requirements.
What is the Special Savings Incentive Scheme?
A new Government scheme to encourage people to save rather than spend.
How will it do that?
By giving people free money - £1 (€1.27) for every £4 saved. The money will be lodged into each individual's savings account every month.
What is the catch?
The funds must be left in the savings account for five years, otherwise the Government will claw back the free money - the full amount withdrawn will be taxed at 23 per cent.
When does it start?
The scheme will start on May 1st. Savers have one year to open an account. No new accounts can be opened after April 30th, 2002.
Where can I put my savings?
In coming weeks banks, building societies, credit unions, life assurers and independent fund managers are expected to aim a wide range of new or adapted products at potential savers under the new scheme. A saver should be able to invest in deposit-type accounts, equities, bonds, unit funds, life assurance products or a mixture of investments in one account. Savers should examine all the products on offer and choose the product that suits them best.
Who can open an account?
Anyone over 18 years of age.
How can an account be opened? To open an account, savers should choose the product that best suits their needs, and apply to open an account with the financial institution offering it.
The Government will not approve or recommend particular savings products. In much the same way as the Special Savings Accounts work, financial institutions will be expected to offer products that meet the rules under which the tax credit can be granted.
What will the saver have to provide?
Savers will have to sign a declaration stating that they have only one of these accounts and that they are resident in the Republic. They will be asked to supply their PPSN number (personal public service number), which is the same as the old RSI number. Anyone who does not have a number should contact their local Social Welfare office.
How many accounts can I have?
Only one account per individual is allowed.
How will it work?
An individual will sign a contract with the chosen financial institution to save an agreed amount each month from a minimum of £10 to a maximum of £200. They will get a tax credit from the Revenue at the new 20 per cent standard rate (from April 6th) for every pound saved, regardless of their tax status.
The effect of the tax credit is that for every £4 saved, the saver will have another £1 lodged to the account - someone saving £50 per month would get an additional £12.50 per month from the Government.
What if I cannot keep up the agreed level of savings?
Under the tax rules of the scheme, the full details of which have not been published yet, it appears that in the first year a saver must save the minimum amount they have initially contracted to save. So if you decide to save £50 per month, you will have to keep saving £50 each month for the first year. But over the remaining four years savers can vary the monthly amount saved within the £10 minimum and £200 maximum levels. However, financial institutions may set their own minimum monthly saving levels.
What will happen to my money?
That depends. Your funds - your own savings and the 25 per cent added each month by the Government - will be invested according to the product you have chosen.
You may have chosen a deposit account offering a fixed or variable rate of interest, or an equity product where returns will be linked to stock market performance, or a mixture of cash and equities. The return will be generated from both your own savings and the Government contribution. The size of the return will depend on the performance of the market invested in.
How will I decide which product to go for? The first consideration for any investor is the level of risk they are prepared to take. A deposit account with a reputable financial institution is probably the most secure way to save for a risk-adverse individual. If a deposit account is the choice, the saver needs to compare the rates on offer from different institutions, as well as any conditions, such as the flexibility to vary the amount saved.
However, because of the new scheme's five-year timeframe, savers should consider investing in equities or a mix of equities and other investments through a managed fund or other product that will allow them to have exposure to a spread of shares. Equities generally produce the best returns over the medium to long term.
What do I need to watch out for?
In choosing a product look out for any charges, such as management charges or bid/offer spreads, that will reduce your return. While demand for the products is expected to be high, the market is likely to be competitive and financial institutions are expected to pare back their fund management charges on the new accounts.
Compare the rates of return offered on deposit accounts by the various institutions. Compare the performance track records of the investment managers. Savers should not accept bid-offer spread pricing on investment products - they should look for transparent single prices.
Can I split my savings between different accounts? Because each individual can only have one fund, it will not be possible to divide your monthly savings between, say, a deposit account with a bank and an investment product with a life assurance company. But financial institutions will be able to package accounts so that the monthly savings are split between different types of investments and maybe between different fund managers. So a product could offer a mixture of cash, equities and other investments within one account.
How do I get my money back?
At the end of five years your fund - your own savings plus the Government contribution and whatever interest or returns have been earned over the period - will crystallise as your lump sum. This sum will be repaid to you less tax at 23 per cent on the interest/return earned. There will be no tax on the capital sum or the Government contribution amount, as long as you have kept the funds in the account for the five-year period.
What if I have to stop saving?
If you have to stop saving you can leave your funds in the account, where they will continue to generate a return depending on the investment chosen. But once you stop saving you will no longer get the Government contribution.
What if I have to withdraw my funds early?
Because the scheme is a five-year one aimed at encouraging medium-term savings, there are penalties for early withdrawals. The amount withdrawn early will be taxed at 23 per cent.
What sort of returns can I expect?
It will depend on the product chosen, the performance it produces and the charges involved. Over a five-year timeframe the returns will usually be linked to the level of risk taken, with higher rewards possible for higher levels of risk.
All investors will get free money from the Government - £1 for every £4 invested - which will also generate a return. See Table.
